The boards of Australian companies are facing the same dilemma as their major shareholders: to buy or not to buy?

While value investors toss up whether to load up and go long with some of their favourite stocks after the recent savage sharemarket correction, companies are pondering buying back their own shares.

It’s a particularly pertinent question for companies preparing to hand down their year-end results. Boards are faced with a once-a-year chance to fully assess the company’s financial position and the opportunity to sell a buyback story to investors.

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Reckon got the ball rolling on Tuesday. It announced a 10 per cent on-market buyback to be conducted by broker Linwar Securities and has 12-months to buy the 13.3 million shares.

UBS head of capital management Michael Liu expects so-called opportunistic buybacks to be a hot topic in local boardrooms right now as directors consider how best to use capital and ways to boost their share price.

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“An opportunistic buyback may work well where a company thinks its shares are significantly undervalued," Mr Liu told Financial Review DealBook.

“From an EPS [earnings per share] and valuation perspective, a buyback in that situation may be a good option compared with other potential uses of capital."

Opportunistic buybacks happen on-market – a company can buy back up to 10 per cent of its shares on issues without seeking shareholder approval.

All that’s required is the lodgement of a form with the Australian Securities and Investments Commission and the Australian Securities Exchange, notifying intention to commence an on-market buyback. The company can start buying shares within 14-days of lodgement and can be inactive for two months before the buyback notice expires.

Gloucester Coal, Australian Wealth Management and James Hardie Industries were among the companies to act in the market downturn of 2008-09 and buy back shares.

There are early indications that buy backs could become more common this year.

Reckon, for example, said it would buyback shares because there were limited opportunities to make suitable acquisitions at reasonable prices.

But the software company left the door open for a change of plans should an acquisition present itself or circumstances change. Broker Goldman Sachs noted market concerns that the company has a history of not executing on open share buybacks.

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Reckon’s not the only company out there with an open mandate to buy back shares. Carsales.com , Challenger , Cudeco , GPT Group and OM Holdings have on-market buybacks that are open, although some have to wait until they report numbers before pouncing on their own shares due to blackout period restrictions.

Empirical evidence shows buybacks can boost a company’s share price in the short-to-medium-term.

UBS analysis of the 28 companies that announced on-market buybacks to July 2011 had outperformed the broader S&P/ASX 200 by an average 2.5 per cent in the month after the buyback and about 2 per cent in the first three months.

“An opportunistic buyback can also send a positive message to the market as to what management and the board think about current share prices," Mr Liu said. “Investors would take it as a good sign that a company is buying back its own shares.“

But much like an merger or acquisition transaction, boards need confidence to implement any capital management program, including a buyback.

Likewise, investors need confidence in the stock’s earnings outlook before they will start pressuring boards to make use of excess capital and even return some to shareholders.

Tuesday afternoon’s sharemarket rally could be the first sign of that confidence. Other commentators have also begun talking about buybacks this reporting season in order to boost performance.

Bell Potter Securities’ wholesale managing director Charlie Aitken told clients on Tuesday in a note that investors should not fear the world is heading into a second iteration of the global financial crisis because the Australian corporate sector was well positioned.

“If anything we have the remarkable situation where most large-cap Australian corporates could initiate buybacks that would be hugely EPS positive considering their cost of capital," Mr Aitken said.

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